TEXT-Fitch affirms Cargill's IDRs at 'A/F1'
Dec 17 - Fitch Ratings has affirmed the ratings of Cargill, Incorporated (Cargill) and its subsidiaries as follows: Cargill --Long-term Issuer Default Rating (IDR) at 'A'; --Senior unsecured notes at 'A'; --Credit facility at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Cargill Ltd. --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Cargill Global Funding PLC --Long-term IDR at 'A'; --Credit facility at 'A'; --Short-term IDR at 'F1'; --Commercial paper at 'F1'. Cargill Asia Pacific Treasury Ltd --Long-term IDR at 'A'; --Short-term IDR at 'F1'; --Credit facility at 'A'; --Commercial paper at 'F1'. The Rating Outlook remains Negative. The Negative Outlook reflects that it is too soon to ascertain the sustainability of Cargill's nascent earnings recovery. Fitch will monitor Cargill's earnings and cash flow for the remainder of fiscal 2013 to better assess future potential volatility and the appropriate amount of total debt to maintain current ratings. Cargill's net earnings rebounded strongly in the fiscal first quarter of 2013 ended Aug. 31, 2012, increasing 313% to $975 million, from a very weak $236 million in the prior year period. Each of the company's five business segments showed improvement. Although the U.S. drought impact is likely to provide near-term headwinds, including lower North American grain handling volumes and challenges in animal protein businesses, there may be some earnings offset from other businesses. Fitch revised Cargill's Outlook to Negative on Dec. 20, 2011, after the weak fiscal first quarter 2012 performance mentioned above. Cargill went on to report a 56% decrease in fiscal 2012 net earnings from continuing operations to $1.18 billion, from record high earnings the previous year. Cargill's disappointing fiscal 2012 earnings, combined with the divestiture of the company's $19 billion equity stake in The Mosaic Company (Mosaic) in May 2011, resulted in a weaker credit profile and a material increase in gross leverage versus historical levels. Cargill fiscal 2012 earnings were hurt by reduced profits in U.S. beef, global soybean processing and asset management, as well as losses in cotton and sugar. Cargill's ratings continue to reflect its competitive position as the largest agricultural company based in the U.S. and one of the biggest privately owned companies in the world. Its operations span every major country and almost every agricultural commodity. Key agricultural operations include oilseeds processing, corn milling, meat processing, and animal nutrition. The ratings incorporate Cargill's extensive geographic and product line diversification, which should lessen operating earnings volatility during most years. However, recent earnings volatility is high for the current rating level. The ratings also factor in Cargill's liquidity, which is enhanced by readily marketable inventory (RMI) and a substantial amount of cash. Balancing out Cargill's credit strengths is the company's exposure to financial businesses that provide earnings diversification but have high earnings volatility. In addition, the company is susceptible to periodic negative free cash flow (FCF) when commodity prices rise and working capital increases. Cargill had total consolidated debt of $15.1 billion at Aug. 31, 2012. Liquidity is ample with $4 billion cash and short-term investments, as well as $6.25 billion of undrawn committed credit facilities, including $5 billion that serves as back-up liquidity for its commercial paper program. Cargill continues to be in compliance with its minimum net worth covenant on its credit facilities. The company's long-term debt maturities consist of $1.5 billion remaining in fiscal 2013, $776 million in 2014, and $836 million in 2015. Fitch believes Cargill is likely to refinance those maturities, but would view it positively if Cargill permanently repaid a material amount of upcoming maturities with cash. In addition to evaluating traditional credit measures, Fitch's analysis of agricultural commodity processors takes into consideration leverage ratios that exclude debt used to finance RMI. This inventory is highly liquid and generally hedged. Similarly, interest expense on debt used to finance RMI is reclassified as cost of goods sold. With the RMI adjustments, Cargill's leverage (total debt to operating EBITDA) was 1.1x for the LTM ended Aug. 31, 2012, and EBITDA to gross interest expense was 12.3x. On an unadjusted basis, consolidated total debt to operating EBITDA was 2.8x and EBITDA/interest was 6.5x. Unadjusted leverage has improved since fiscal 2012, but is still slightly high for the rating level given recent earnings volatility. What Could Trigger a Rating Action Future developments, that may individually or collectively lead to a negative rating action include: --Lack of sustainability of Cargill's earnings recovery in fiscal 2013, without material and permanent debt reduction. --Fitch's determination that given recent earnings volatility and elevated commodity prices, Cargill's total debt and unadjusted leverage over a multi-year period remain too high for the rating level. --Large, debt-financed acquisition(s) and/or extraordinarily high increases in capital expenditures. Future developments, that may potentially lead to a positive rating action include: --A substantial decrease in leverage in fiscal 2013 from fiscal 2012 due to significant, sustainable earnings improvement on an annual basis and/or permanent debt reduction, along with the maintenance of high liquidity, could result in a Stable Outlook. Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology
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